Doc - "My experience in small companies I have been involved in is that you do absolutely everything you can to avoid filing..." Apparently the 240+ companies that have filed Chapter 11 are different then the companies you've crossed paths with. LOL..

As far as service companies refusing to do work for someone who had worked for a company that had filed bankruptcy: a company can't even do that to a company that owed the service company that had burned them for hundreds of $millions. I'm sure you remember Jack Stanley. He tried to corner as much NG in S Texas as possible. The entire scheme blew up in his face. Which led him to a place in the Guiness Book of Records: the largest PERSONAL filing of bankruptcy in history at that time. While in Chapter 11 Halliburton, for which he was burning for a huge debt, refused to do any work for the company. The bankruptcy judge told Halliburton it had to or they would be charged with restraint of trade. But the judge guaranteed they would be paid in full for the new work.

I've personally seen a number of managers that ran their companies into bankruptcy and then watched their future careers flourish.

Damn, just found some very bad news for some oil company investors almost as bad as the money lost: some will have to pay taxes on those debts eliminated by bankruptcy as though it were income. IOW pay taxes on money they never received. From:

"Investors who own shares in companies and partnerships that are suffering from the hard times in the oil patch will face an even bigger headache thanks to the tax consequences of the price drop. The problem — essentially a situation that requires investors to book income for tax purposes and to pay hefty federal taxes even though they don’t actually receive any cash...a direct result of the ongoing restructuring of...debt.

"Many oil production ventures are structured as limited partnerships or are taxed that way...it allowed income to flow directly to investors without the double taxation that would kick in if the ventures were organized as corporations."

"...investors, who are now learning to their chagrin that they may owe significant taxes on the dollar amount of forgiveness of the partnerships’ debt that can accompany a bankruptcy or an out-of-court restructuring...federal tax law requires that their owners pay income tax on their share of the partnership’s debt that was forgiven by creditors in the restructuring. This is true even though the investors may have received no actual cash income as a result of the restructuring transaction. And it’s true for all types of entities that are taxed as partnerships — including master limited partnerships and limited liability companies."

IOW imagine if you are a 10% partner of a company that has $1 billion of debt reduced by a Chapter 11 bankruptcy. You may now be required to pay taxes on $100 million as income even though you never saw a penny of it. I wonder how many brokers that sold investors on a limited partnership warned them of this possibility? Well, it's probably there...in the fine print at the bottom of Page 20. LOL.

Last edited by ROCKMAN on Mon 17 Jul 2017, 11:42:23, edited 1 time in total.

While in Chapter 11 Halliburton, for which he was burning for a huge debt, refused to do any work for the company. The bankruptcy judge told Halliburton it had to or they would be charged with restraint of trade. But the judge guaranteed they would be paid in full for the new work.

different situation than what I proposed. In the case you point to the individual was under court ruled protection....service companies can't refuse to work but are generally given a guaranty of payment. What I suggested is once that individual moves on somewhere else any of the service providers that got stiffed through his previous court relief will not be lining up for work with his new firm, there is no requirement for them to do so either. In a similar vein it affects your ability to raise capital and retain partners. The companies I had involvement with always dug pretty deep on the backgrounds of main players in companies we did business with and any who had previously gone the Chapter 11 route were immediately redflagged, the thought being there was some risk that they would not be able to pay their way.

ROCKMAN wrote:IOW imagine if you are a 10% partner of a company that has $1 billion of debt reduced by a Chapter 11 bankruptcy. You may now be required to pay taxes on $100 million as income even though you never saw a penny of it. I wonder how many brokers that sold investors on a limited partnership warned them of this possibility? Well, it's probably there...in the fine print at the bottom of Page 20. LOL.

Sounds familiar, just like the hapless "investors" who bought into the "broker's" subprime mortgage scam. But aren't you doing the same right here, at this forum RM? Minimizing the risks to keep the game afloat. You should have known about that fine print.

Both sides are the same. The brokers and the investors don't want to hear the truth. Sleep better at night that way. No responsibility.

There's nothing deeper than love. In fairy tales, the princesses kiss the frogs, and the frogs become princes. In real life,the princesses kiss princes, and the princes turn into frogs

“Bitterness is like cancer. It eats upon the host. But anger is like fire. It burns it all clean.” ― Maya Angelou

pstarr - "...aren't you doing the same right here, at this forum RM? Minimizing the risks to keep the game afloat". The Rockman??? Hell, buddy. I think your prejudice ruins your ability to see what's right in front of your eyes: for years here and at the Oil Drum the Rockman has been one of the most credible AND EXPERIENCED sources of negative information about the petroleum industry.

Just consider what I just posted about some investors getting slammed with huge tax burdens as a result of Chapter 11 filings. You and the other knee jerks here are so biased you have difficulty seeing how I muster educated you on another bit of our dirty laundry. LOL. Just like Graeme when I repeated pointed out that delaying the border crossing permit of the Keystone XL pipeline wouldn't inhibit imports...and it didn't. Or folks here who continue to repeat the lie that the industry has been restricted from exporting oil....which I proved countless times to the govt's own data base. Or how dumping of frac fluids by unscrupulous disposal companies was the primary cause of that pollution and not the actual frac'ng operation. I've explained in great detail how Texas came to have world class alterative energy and that it had nothing to do with "saving the environment" because the vast majority of Texans supported wind power development purely due to their financial interests.

None of those and countless other stories about negative oil patch activities exactly qualifies me as a big cheerleader for the industry, does it? But it's impossible for you and a small minority here to see it.

But most others get it. LOL. Which is why the thread THE ROCKMAN CREATED exposing that dirty little secret about bankruptcy filings (unknown by the vast majority here) got over 2,500 views in just a week.

Too much to summarize but here's a pertinent portion of the report titled: "Rising oil prices may mean more bankruptcies"

"Private equity investors and other sophisticated parties (such as institutional bondholders) understand that rising commodity prices are an opportunity and that Chapter 11 bankruptcy may provide the means to take control of the debtor and to maximize the future upside value that will be realized if prices continue to rise."

As an example recall the story of Halcon. After the Chapter 11 agreement with the creditors 96% of the stock was transfered to those creditors. This eliminated more then $1 BILLION in debt and produced an $600 million asset based credit line. The new owners/creditors then sold Bakken assets for $1.4 BILLION which produced an 18% increase in stock value. The 96% of the stock now owned by the former creditors.

And what is Halcon up to these days? Getting heavy into the Permian Basin which has become red hot in the last year. Subject to how that effort turns out and oil/NG prices in a few years the value of that 96% of the stock might be several times larger then the debt it was traded for.

That's what the report explains: a developing incentive for creditors to push damaged companies into Chapter 11 "debtor-in-possession" reorganizations. And the great advantage the former creditors have available:

"Debtor-in-possession financing or DIP financing is a special form of financing provided for companies in financial distress, typically during restructuring under corporate bankruptcy law, such as Chapter 11 bankruptcy. Usually, this debt is considered senior to all other debt, equity, and any other securities issued by a company — violating any absolute priority rule by placing the new financing ahead of a company's existing debts for payment.

It may be used to keep a business operating until it can be sold as a going concern, if this is likely to provide a greater return to creditors than the firm's closure and a liquidation of assets. It may also give a troubled company a new start, albeit under strict conditions. In this case, "debtor in possession" financing refers to debt incurred while in bankruptcy, and "exit financing" is debt incurred upon emerging from reorganisation under bankruptcy law."

Which explains how Halcon, a busted company, probably got a brand new shiny $600 MILLION credit line.

Just more examples of the oil patch bankruptcy filings are good news for the sector compared to the BS put out by some of our local armchair warriors. Of course, not good news for many of the folks they had loaned money to the industry. A variety of reports are crediting the new borrowing capabilities of post Chapter 11 filings for much of the projected increase in industry capital spending late 2017 and throughout 2018. Just the opposite of what the whiners were predicting. From Oct 2016:

Bankruptcy Rebound? Oil, Gas Companies Bounce Back from Chapter 11

"Goodrich Petroleum Corp. has emerged from bankruptcy with the same assets in place, a significantly improved capital structure and substantially less long-term debt.

Goodrich had sought bankruptcy protection in April to eliminate close to $400 million in debt. It was one of dozens of oil and gas companies that succumbed to the market downturn from low commodity prices that left the sector roughly $17 billion in debt. As part of its reorganization plan, Goodrich received $40 million in new capital through the issuance of second lien senior secured notes due in 2019. Half of it was earmarked to pay down its outstanding debt from a previous credit facility. The remaining $20 million is targeted for the initial development of the company’s Haynesville shale drilling plan, according to the statement.

Goodrich is the latest E&P company in recent weeks to emerge on the scene post-bankruptcy. SandRidge Energy returned to public trading on the New York Stock Exchange. It emerged from bankruptcy protection Tuesday, shedding $3.7 billion in debt. It now has zero net debt and more than $500 million in liquidity. Eliminating the debt saves the company about $300 million a year in interest payments."

Just imagine: some folks were saying these bankruptcy filings were actually bad news for the companies. They did originate from the devastating drop in oil prices. But the bankruptcy filings turned out to be great improvements for those companies.

At this point it might be enlightening to separate oil field service companies (rig owners, frac equilibrium owners, etc.) from E&P companies. As of April 2017 127 service companies have filed C11. The total aggregate debt administered under these filings is $26 BILLION. Of that amount $9.5 BILLION is classified as "unsecured"...the easiest debt to dispose of.

As of April 2017, 123 E&P companies have filed some level of bankruptcy. Total aggregate debt administered is $80 BILLION. Of that total $48 BILLION is classified as unsecured.

Actually considering the industry borrowed about $1.5 TRILLION during the boom years only about 7% of that total has been pulled into bankruptcy so far. So while the oil patch took a hard hit with the decline of oil prices 93% of that debt is still being serviced as well as some monies left over for some drilling. And now some additional revenue is becoming available as debt/interest payments are being eliminated and new credit lines are being established thanks to C11 restructuring.

Not exactly the end of life for the industry as some have been preaching. LOL

RMI think you are doing a pretty substantial service to a wider audience by shedding some 'real world' consequences to this shale BK situation.

As always, there can be a little more to the story ...

Two of the companies you have mentioned related to BK stuff - Halcon and Goodrich - were 2 of the top 3 main players in the recent Tuscaloosa Marine Shale efforts. (Encana was the third).The 60 or so wells drilled in the TMS were mostly ineffective as the depth and geology were very daunting.However, partly due to the data sharing amongst the big 3, the later wells continued to show improvement and there are now a handful of producing TMS wells, although further work has been halted.

So, even though much capital has been spent with little return, a workable, marginally effective format for successful TMS development has been established, although much higher WTI pricing would be needed to justify going forward.

Coffee - The oil in the TMS (like the other shales) has been known for decades. I had a company pitch the idea of drilling it horizontally 25 years ago. Common for nice oil shows when drilling vertical wells thru it. I don't think they ever sold the deal. The drilling tech was just developing and oil prices were too low for such a radical risk. Just like with the Eagle Ford Shale at that time.

And some details on the Goodrich C11 settlement. First, not only did the creditors take a bit of a hit but the shareholders lost everything. The company now belongs to the original debt holders and the new lenders (who poney'd up $40 million) and management. Their biggest acreage position (167,000 acs) is in the TMS.

In accordance with the Plan of Reorganization, the Company's existing common stock has been cancelled, and its new common stock will be issued to the second lien notes claim holders, unsecured notes claim holders, general unsecured claim holders and management."

But with only $20 million in operating funds the TMS is too risky and expensive. Instead it is drilling (9,000' to 10,000' laterals) on its 8,300 acs in the Haynesville Shale. As of June 2017:

"Current production for the Company is approximately 50,000 Mcfe per day (up from 26,000 Mcfe per day average in the first quarter) and the Company has increased its fourth quarter of 2017 guidance to an average of 55,000 – 60,000 Mcfe per day."

FYI: The current value of the newly issued stock Goodrich is $114 million.

In the case of Halcon (with 96% of its stock belonging to former creditors) it looks liked they walked away from their huge TMS acreage position and have gone heavy into the Permian Basin. Currently its total stock is worth $1 BILLION.

Not too shabby for a couple of companies that filed bankruptcy, eh? LOL.

It would be interesting to look back a few years at companies that have used Chapter 11 or similar instruments to avoid liquidation in order to assess how much an investor would have made if he had hung on through the reorganization to recent time. Probably a lot of different stories but I bet there are a few good ones.

On another site, a smaller industry participant mentioned that many operators were well aware of the dangers of extended debt and acted defensively as best they could so as not to lose their hard earned assets to vulture capitalists by way of DIPs and other financial machinations.

Yes, it would be fascinating to see the vast transfer of wealth that was/is taking place and how much went to the people with lending skills versus drilling expertise.

Coffee - Here's a hint. But I can't tell from the article if they are taking into account debtor in possession settlement when the debtors end up owning a portion or all of the company. From Sept 2016:

"Investors’ losses from US oil and gas company bankruptcies since 2015 have been proportionally greater than in previous downturns as the industry’s debt-fuelled boom has gone into reverse, according to Moody’s, the rating agency.

In 15 defaults studied by the agency, lenders have recovered just 21 per cent of the face value of their debt on average, compared with a 58.6 per cent average recovery for all defaults before 2015.

Holders of unsecured oil company bonds in default have on average recovered less than 6 per cent of their face value.

The very low default {I think they meant " recovery"} rates reflect the weak market for oil and gas assets being sold out of bankruptcy and the high debt levels that were loaded on to companies during the boom that collapsed as crude prices slumped in the second half of 2014.

Between 2010 and 2014, the leading US independent oil and gas production companies added $84bn to their net debt, taking the total to $189bn, according to company data compiled by Bloomberg. Between the start of 2015 and the end of July this year, 90 US oil and gas producers went into bankruptcy, with total debt of $66.5bn, according to Haynes and Boone, the law firm. "

So, if I understand the purpose of the thread, I could summarize it as: Bankruptcies amongst the Oil Companies, has rarely lead to them closing*, rather the Oil Companies come out stronger. But it is the wider investment community would is taking a much stronger hit than previously. So Good for Oil Companies, but Bad for the general economy.

* I believe this was the point of the thread so show that bankruptcies in the Oil Patch did not necessarily lead to collapsing oil supply.

However, this shafting of the investors means that it is likely that in the future funding will be harder to come by, and so put a squeeze on future investment and future supplies, but this is all to complex for me to put any hard data on how it will all work out. Is sounds like the present BAU is being extended at the expense of supplies in the long run (=unspecified time frame).

Ed - The companies filing chapter 11 took a big hit also. The bankruptcy filings just allow them to lessen the pain to some degree. More important: it allows them to survive. But you need to keep in mind loaning money to a corporation is not investing in it. Neither is providing services and material for a fee. As far as the companies that had tens of $BILLIONS in unsecured bonds they didn't buy into the companies.

So bankruptcy involves settling with lenders, vendors and shareholders. How each one makes out once the C11 is cleared varies greatly. In the case of Halcon the original owners of the company, the shareholders, took a huge hit: their ownership dropped from 100% to 4%. The lenders and vendors now own 96% of the stock. Stock that now has a total value of $1 BILLION. This is the debtor in possession settlement I mentioned several times: the debtors (lenders and vendors) take possession of all or most of the company.

As far as no one lending a company that clears bankruptcy in any form just the opposite of your proposition is true. The logic is simple: who would you rather loan money to: managers who ran a company into the ground and owe $BILLIONS that it can't even make the interest payments on? Or a company run by a new set of managers who own 96% of the stock with no debt and hundreds of $MILLIONS in PROVED PRODUCING RESERVES? That describes Halcon after it cleared C11 bankruptcy and explains why lenders have provided it a $600 asset based credit line. A credit line Halcon is using to take a very big position in the Permian Basin. Depending on the future price of oil and how its drilling efforts go those lenders/vendors may own a company worth considerably more the the debt originally owed to them.

In the case of Goodrich much of the debt was not cancelled. But enough to allow it to borrow $40 million (and that lender is guaranteed repayment by the bankruptcy court.) It is using $20 million to pay off some vendors and it using the other $20 million to drill Haynesville Shale wells, the first two of which are very nice producers.

As much as some would like to paint the recent bankruptcies with a broad one size fits all brush it can't be done. In some cases the lenders took most of the hit. In others the vendors (not as often). And income cases the owners of the companies got slaughtered to the benefit of the lenders and vendors.

Which is why I've posted a variety of settlements. But in almost all cases the surviving entity can resume carrying on business which includes establishing new credit lines. Which is exactly how federal bankruptcy laws were designed the way they were: to provide a method for the corporation to stay in business and carry on operations to some degree. .

Just wanted to say how very surprised I am to see over 5,000 views of this thread. I was expecting a few hundred at most. Thought it might not be that interesting to many here. Just thought it would be a useful counterpoint to some of the slightly hysterical posts about oil patch bankruptcy filings.

Just wanted to say how very surprised I am to see over 5,000 views of this thread. I was expecting a few hundred at most.

just wait until the ETPers find their way here and begin the long tired tirade. Might be something like "bankruptcies are all about thermodynamics. It is the movement of entropy and the desire for lower free energy that drives companies to declare chapter 11".

Doc - I specifically designed the title of the thread to attack/enrage them and others of their ilk. I'm a tad surprised to not see more push back. OTHO it's rather difficult to argue with DOCUMENTED FACTS, ain't it? LOL.